- Following on from the massive 13.9% rebound in the September quarter, economic growth contracted in the final quarter of 2020, falling 1%.
- A deeper-than-expected fall in construction over the quarter dragged the economy down. And retail trade and accommodation started to feel the pain of an absence of international tourists.
- We’re likely to see another slight contraction in the first quarter of 2021. The slight technical recession is more like turbulence after a massive aerial manoeuvre.
- However, it’s important to look forward. Vaccine rollouts and talks of a travel bubble with Australia (and hopefully more countries into next year) should support solid growth into 2022.
Following on from the massive 13.9% rebound in the September quarter, GDP posted a 1% fall in the fourth quarter as payback from such a massive jump. Over 2020 as a whole the economy shrank 2.9%, which highlights the massive hit that covid caused last year. We’re likely to see another slight contraction in the first quarter of 2021. The slight technical recession is more like turbulence after a massive disruption earlier in 2020. Imagine a plane that has completed a stalled nosedive recovery manoeuvre. After nosediving in the second quarter, the plane pulled up sharply in the third, and is now hitting a bit of turbulence. Three of the plane’s four engines are humming. It’s the fourth engine that exports services, such as tourism and education, that remains without power.
The fall in construction over the quarter was much deeper than expected. Most of the pullback in construction can be attributed as a ‘payback’ of sorts from the spike in the third quarter. Commercial construction was particularly weak, although residential construction was up over the quarter. Retail trade and accommodation recorded a drop in activity, related to the lack of international tourism normally abundant this time of year. International tourists are conspicuously absent, and their absence will be felt to a greater extent in the first quarter.
The December quarter is well behind us. The first quarter of 2021 is likely to see a fall in GDP as the closed border hammers industries reliant on foreign visitors. On top of the border restrictions was of course the two Level 3 lockdowns in Auckland. A second quarterly contraction would be a technical recession. And unemployment may lift a little as a result. However, any recorded fall in the March quarter is now likely to be lower following an unexpected large decline in the December quarter. Turbulence is to expected as we continue to navigate the covid crisis. Barring another prolonged lockdown, the NZ economy is now on a firm recovery.
Construction takes a smoko break
The underlying picture was always going to be a balance between industries experiencing payback from the massive rebound in Q3 and others that experienced an ongoing recovery from the depths of lockdown. It looks as though the phenomenal pace of the third quarter recovery has caught up on the likes of construction and manufacturing.
Good producing industries were the main contributors to the fall in GDP, down 3.2% in the quarter. Construction fell sharply following the record jump in Q3. Weaker construction activity centred on commercial and infrastructure related building. In contrast, residential construction managed to generate a further gain in activity. Record low mortgage rates and a booming housing market has spurned on house building. And going by recent building consent data, residential construction activity will continue to support GDP over 2021. Once the building sector catches its breath, we should see a progressively larger contribution from the sector. There is after all an anticipation of big infrastructure spending to come.
Service industries posted a small gain overall in the quarter. As expected, transport activity recovered further, rising 7% in the quarter. However, the transport industry is one of the most exposed to covid-related restrictions and was still down almost 26% compared to 2019 (see chart above). Business and professional services posted a solid 2% gain. Almost entirely offsetting gains in transport were falls in retail and accommodation services. The winter boost in domestic tourism wasn’t replaced by the usual surge in international arrivals – a development which intensified over the first quarter of this year.
Spending also pulled back hard
Closed borders were clearly evident in the 1.5% quarterly fall in the expenditure measure of GDP. Exports dropped around 1% on the back of the absence of international visitors which would typically provide a boost to our export services. Imports in contrast jumped 9.1% as the injection of covid policy support has seen a surge in demand for cars, which have to be brought into the country. On an annual basis though imports were significantly lower as Kiwi were forced to holiday at home. Household spending rose in the December quarter, helped by the holiday season and loose social distancing restrictions. But on an annual basis, spending was down 1.7% over the year ended December 2020, driven by a fall in household spending on services. The investment component in expenditure GDP also fell by 1.4%, mirroring the decline in construction activity. Investment in construction as well as plant, machinery and equipment declined by 4.5% in the quarter. Covid clearly still incites caution among businesses when it comes to investing for the future.
Per capita GDP underscores the covid-related hit
Looking at GDP per capita the extent of the developments of last year are clearly laid out. Per capita GDP was 1.2% lower in the December quarter following the fall in overall GDP in combination with a 0.2% rise in New Zealand’s population. Over 2020 as a whole per capita GDP was 4.9% lower as the economy insulated itself and due to a surge in New Zealanders racing back just prior to lockdown.
With an unemployment rate at below 5% at the end of 2020, the fall in income across Aotearoa of this size is not likely to have been as widely felt as might be expected. That’s in part because the Government, like most in the developed world, have taken a weighty share of the pain on their balance sheets.
The big picture
The December quarter is well behind us. And we’re already in the third trimester of the first quarter of 2021. We expect to see economic activity begin the new year subdued with a continued fall in GDP, as the closed border hammers industries reliant on foreign visitors. In any given year, Q1 is traditionally peak international tourism season. International tourists lap up the Kiwi summer and international students arrive before the semester begins. The Q4 report foreshadows the damage caused by the border restrictions. Indeed, we are yet to feel the full impact of the closed borders. And on top of this, the March quarter also captured the two Level 3 lockdowns Auckland faced in February. Although we’ve learned to live and work through various alert levels, economic activity is restricted when social distancing measures are tightened. Timely Kiwibank spend data show how disruptive the lockdown was on Auckland’s economic activity, particularly within the service industry. Given the ongoing border restrictions and the ‘snap’ lockdowns, we’re picking around a 0.5% contraction over the March quarter.
Near-term bumps however are expected. Continued absence of foreign visitors means industries reliant on our service exports – tourism and education – will continue to struggle. And until we achieve widespread vaccination, lockdowns will be part of the game plan to manage covid. On the other hand, the rampant housing market should fuel momentum in the construction sector. The industry’s December quarter performance should not be read as a set-back, but rather payback for its outperformance in the September quarter.
Overall, we’re not expecting our drawbridge to be let down until 2022, at the earliest. The stark unevenness in the recovery at the industry level will likely continue in the quarters to follow. We are expecting growth to be modest over 2021. And despite the rebound we’re forecasting over this year, economic activity is not expected to surpass the pre-covid peak until early 2022.
Nonetheless, there’s light at the end of the tunnel. NZ’s vaccination programme is underway, with the general population set to be inoculated from July. And barring another lockdown which would rival the Great Lockdown of 2020, the Kiwi economy is now on a recovery trajectory. Neither the December nor March quarter GDP report cards are likely to add or erase brushstrokes from the big picture.